The “Generous” IRA Strategy That Quietly Costs Your Kids More in Taxes

You may have set up what you think is a solid plan to avoid taxes on your IRA.

You’ll let it grow, take the required minimum distributions and pass it on to your kids—not thinking they’ll pay more down the line. Because on the surface, it doesn’t sound like a terrible idea. It feels both disciplined and responsible. 

Further, it aligns with the belief that preserving assets is inherently good for the next generation.

For many Pacific Gas and Electric Company retirees with a pension and Social Security, this instinct can lead to a rather surprising outcome.

The intention is generosity, but the way IRAs are taxed often turns that decision into something else entirely. Instead of preserving wealth, you may be shifting the tax bill from your lower-rate retirement years into your kids’ highest-earning years. Ouch.

The Real Decision You’re Making (Whether You Realize It or Not) 

If you don’t need your IRA for income, it’s natural to default to waiting. After all, why trigger taxes now if you’re not forced to? That logic has been reinforced for decades: defer taxes as long as possible, and let compounding do the work behind the scenes. 

The problem is that with traditional retirement accounts, taxes aren’t optional; they’re just deferred.

The real decision isn’t really whether you’ll pay taxes, but when and who will end up paying them. When you rely solely on required minimum distributions (RMDs), you choose to delay that liability during your retirement years and push it into the future, where it will eventually land on your children.

There’s a specific, measurable shift in responsibility (this isn’t purely theoretical). You’re deciding—whether you know it or not—that taxes you could pay under controlled conditions today will instead be paid later, while your kids are earning peak incomes and have only 10 years to withdraw the money. 

The Problem With “Let It Grow” 

Let’s consider a typical example. A retired PG&E employee, call him Mike, is 68 years old. He has a steady pension, Social Security, and approximately $1.4 million in his 401(k), which has now been rolled into an IRA.

Because his core expenses are covered, he doesn’t need to draw from that account. 

So Mike does what he thinks is prudent: he leaves the IRA alone. He plans to take required minimum distributions only when necessary but otherwise allows the account to just keep on growing. In his mind, this is a disciplined and generous decision. He’s preserving a meaningful asset that his children will eventually inherit. 

Fast forward about 15 or 20 years. The account has grown to roughly $2 million. When Mike passes away, his two children, both in their 50s and likely in their highest earning years, will inherit his IRA. Under current rules, they’re required to distribute the entire balance within 10 years. They could take an RMD based on their ages, but that is a bad idea because all the money has to be out of the IRA within 10 years. That translates to roughly $100,000 in additional taxable income per year, layered on top of their existing salaries, bonuses, and other earnings.

At that point, the flexibility Mike once had is gone.

His children are now operating within a compressed timeline, facing higher marginal tax rates, and with less flexibility in how and when they withdraw the money.

What was intended as a gift becomes a constraint because of how and when it’ll be taxed.

Why This Happens (Even When You Mean Well) 

It goes without saying that this isn’t driven by neglect or bad intentions. Never.

It’s a product of a very common and understandable instinct: avoiding taxes whenever possible (again, not generally bad advice). For most people, the idea of voluntarily accelerating taxes feels counterintuitive, especially after decades of being told to defer them. 

However, retirement, especially for those with pensions, changes the equation. Your income may be more stable and predictable than it was during your working years, and in many cases, you have a window where your tax rate is relatively manageable.

More importantly, you have control. 

Right now, you can decide how much income you recognize each year. You can choose whether to stay within a certain tax bracket, whether to accelerate distributions, or whether to reposition assets so less of your IRA is taxed at your kids’ highest rates. Your children won’t be afforded that same flexibility. They’ll be making decisions within the constraints of their own careers, their own income levels, and a fixed timeline imposed by the IRS. 

So, while the intention is to help, the decision to defer can unintentionally shift the burden into a less favorable environment. 

The Hidden Trade Most People Miss 

When retirees default to “wait as long as possible,” it feels like patience and discipline, not a trade. But it is a trade, just one that isn’t immediately visible. 

You choose to avoid paying taxes during years when your income is relatively stable and, in many cases, lower than it used to be.

In exchange, your children will pay those taxes during years when their income is likely at its peak. The result is a higher total tax burden across generations. 

This is the core blind spot. Tax deferral is often equated with smart planning, but with IRAs, deferral doesn’t mean elimination. There’s no step-up in basis.

Every dollar will eventually be taxed as ordinary income. What matters is simple: when the money comes out, who decides that timing, and what tax rate hits it when it does.

What a More Intentional Approach Looks Like 

A more thoughtful approach simply requires shifting from a passive mindset to an intentional one. To ask the questions of when those taxes should be paid, and under what conditions. 

For many pension-backed retirees, this opens the door to paying taxes gradually while you’re in control, instead of compressing them into a few high-income years later. Partial Roth conversions can gradually move money into a tax-free environment, reducing the taxable account your children will inherit. Bracket-filling allows you to recognize income up to the top of a favorable tax bracket each year, making use of space that would otherwise go unused. Timing distributions before Social Security begins can also create a window where income is lower and tax rates are more manageable. 

In the earlier example, even modest annual adjustments and consistent decisions over several years could significantly reduce the future tax pressure on Mike’s children. The goal isn’t to eliminate taxes entirely, but to pay them under better conditions, with more control and less compression. Deferring isn’t everything.

A Different Way to Think About Generosity 

Generosity is often measured by the size of the inheritance. But in this context, it may be more accurately measured by the experience you leave behind. A large account that comes with a compressed tax burden and limited flexibility can feel very different from a smaller, more tax-efficient inheritance. 

Your children will inherit the consequences of the decisions made around inheriting the account, or the consequences of its absence—whether good or bad.

So if your current plan is to leave your IRA untouched, it’s worth asking a better question: are you truly preserving wealth for your family, or simply postponing a decision they will be forced to make under less favorable conditions? 

Ultimately, the key takeaway is this: the impact of your IRA strategy isn’t purely about the number you leave, but about when and how those assets are taxed. Being intentional with timing can meaningfully benefit your family, often more than simply letting the account balance grow.